Credit: Steve Jurvetson/Wikipedia

Amazon's growth or profit dilemma

The Cloud is raining dollars on the e-behemoth, but that's putting a new pressure on Jeff Bezos to return value to shareholders.

by Adam Gale
Last Updated: 25 Apr 2016

One of the early names Jeff Bezos considered for his business in 1995 was It’s an apt address, and one that still redirects to Amazon’s US site. The firm’s feverish conquest of global retail has made Genghis Khan look dilatory. It’s grown from nothing to an $107bn (£74bn) business in just over 20 years.

The internet is eating the world, and Amazon’s right in the middle of the feeding frenzy. It’s devoured much of the book industry, and has steadily expanded into more or less all other forms of retail, even fresh food (rather ominously for the Big Four grocers, there’s talk of it entering that market here by buying Ocado).

Amazon’s glorious onward march has been marred, however, by one teensy, tiny problem. Profits have always been elusive, or at best meagre.

This is because the very reasons the online retailer has grown so much also prevent it from making any money. Low prices require low margins, while constantly expanding range and increasing delivery speeds both require substantial and ongoing investment. There’s no money left for anything so conventional as a dividend.  

Or is there? Amazon effectively invented the Cloud as we know it a decade ago, and relentlessly pursued its first mover advantage there. Now, its rapidly expanding Cloud division is starting to rake in serious cash at relatively low cost. Amazon finally has the ability to make a meaningful profit, which creates a new dilemma.

Bezos won’t stop until Amazon has conquered the world, so he wants growth above all things. But his fellow shareholders have different priorities – they want the stock to go up, and to get a dividend. When Amazon didn’t have any money, they were content with just the former, but now it’s making a profit ($596m last year), they’ll be getting restless.

This is why Bezos just announced a $5bn share buyback in a stock exchange announcement. At first glance, it might appear to be a step towards a higher profit, lower growth future, but you can be sure that Bezos’ world domination plans remain unchanged.

For a start, buybacks are nothing new for Amazon, with a $2bn return to shareholders announced in 2010 (though only partly completed, over the next two years). They are also hardly unusual for cash-generative retailers generally, when they find themselves particularly liquid.

The buyback is really a way of fobbing investors off (hopefully for another six years) after the firm’s share price tanked (it’s lost over a quarter of its value since the New Year) - without having to do anything so encumbering as establishing a regular dividend.

It certainly doesn’t mean that Amazon’s investment in its own growth will falter. The firm’s free cash flow was over $7bn last year, so it can more than afford $5bn over several years.

It might decrease the chances of it announcing a big acquisition any time soon (sorry Ocado), but if anything it’s a sign of Bezos’ optimism for the future. He knows Amazon can afford to do this and still grow - which should make every other retailer in every category rather less optimistic. It’s not just high street book shops that need to watch out

This article was updated in Febuary 2016, having first been published in July 2015.

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